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Go Europe! An Overview of European ETFs

With Asia so hyped and U.S. markets so richly priced, add a little Continental exposure to your portfolio.

Asia is so hyped these days, and the U.S. markets seem so richly priced. A good way to diversify is to add a little Continental exposure to your portfolio. There are exchange-traded funds that cover countries from Austria to the U.K. that will help you do just that.

iShares, for example, offers funds such as the MSCI Austria Index Fund (NYSE:EWO) and MSCI UK Index Fund (NYSE:EWU). For investors who seek a less narrowly focused approach, there are funds that range from SSGA's DJ EURO STOXX 50 ETF (NYSE:FEZ) to the even more broadly diversified Vanguard European ETF (AMEX:VGK), which holds around 600 stocks. There's even a trio of new funds from WisdomTree that focuses on dividend-paying stocks, one of them being the Europe SmallCap Dividend Fund (NYSE:DFE), which has the additional bonus of providing exposure to small-cap stocks.

Country or region? Single-country funds provide investors exposure to non-U.S. stocks on a country-by-country basis, while regional funds cover multiple countries in a single ETF. With either of these funds, you can get exposure to stocks that may not trade in the United States.

Single-country funds carry more risk, since they're subject to changes affecting that particular country, and they can sometimes be heavily influenced by changes to only a handful of stocks. The iShares Spain Index Fund (NYSE:EWP), for example, has about half of its assets invested in only three companies. And the bull was running in Spain last year, with EWP up nearly 50%, showing that concentration sometimes provides excellent returns. Single-country funds do tend to have higher expense ratios and may also experience bid-ask spreads that can be fairly wide.

The broader-based funds are usually the easiest to choose from, since you get exposure to a wide geographical area with one investment. The regional funds have expense ratios that start at 0.18% for VGK and continue on up to around 0.60%, making them a less expensive option than the typical country fund.

Of course, if you want to tailor your portfolio, a collection of country funds might suit you best, so you can pick and choose the countries right for you.

Economic growthSeveral factors have helped to propel European economies and markets even at a time when U.S. markets are moving at a slower pace. A wave of political reform across several European countries, such as in France, and newly elected, center-right-leaning leaders have helped to support bull markets across Europe in anticipation of economic reforms. The euro continues to reach new highs against the dollar, and that strength raises the value of foreign sales and returns. Consumer sentiment is also strong, and the resulting spending is an important foundation for European economies. In addition, growing economies in Eastern Europe, like the energy-fed Russian economy, have helped fuel the Western European economies. Finally, expanding trade with Asia has also benefited Europe.

Early in 2007, the European Commission forecasted economic growth in the Eurozone countries to be around 2.6% this year. The IMF had a more moderate 2.3% forecast for Europe, but that estimate also positioned this region to outpace expected U.S. economic growth of around 2.2%.

Important indices Index selection is an important component of any ETF, and with the European funds available to U.S. investors, there are a number of index options. One important difference is that European indices include the U.K. and Switzerland markets, while Eurozone benchmarks exclude those two countries.

The Dow Jones EuroStoxx 50 Index, for example, has only 50 stocks from Eurozone companies, most of which are large-cap names. The S&P Europe 350 is much broader than the Stoxx and includes the 13 Eurozone countries, along with Denmark, Norway, Sweden, Switzerland, and the U.K. The MSCI Europe Index, on the other hand, has roughly 600 stocks and includes large caps along with small and mid-caps. The MSCI is constructed from a country and industry level, while other indices can be built from a regional or country level. Finally, you might also want to look at the historical tracking error that the ETF has experienced compared to its index.

Fund-specificAlthough there are nearly two dozen country and regional European ETFs to choose from, most investors will want to gravitate toward one of the more broadly diversified funds to get quick and easy exposure to a wide number of stocks and countries. Even with the regional choices, not all of the funds are carbon copies, and investors would be wise to look closely before buying any of these ETFs.

FEZ tracks The Dow Jones EuroStoxx 50 Index, which is composed of blue-chip companies in the Eurozone. The index covers 50 stocks from 12 countries that use the euro as their currency: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and the fund's portfolio of roughly 50 stocks, with a top exposure of just under 6%. The fund has been around since late 2002, giving it one of the longest track records in this area. FEZ has an expense ratio of 0.33% and has attracted a solid $600 million in assets.

DFE tracks the WisdomTree Europe SmallCap Dividend Index, which is composed of companies that make up the bottom 25% of the market capitalization of the WisdomTree Europe Dividend Index, a fundamentally weighted index of companies incorporated in developed Europe that pay regular cash dividends. In contrast to FEZ, which has no exposure to the U.K., DFE has roughly 45% of its assets invested in that country. Medium- and small-cap companies make up the bulk of its investments, once again a stark separation from FEZ. DFE is just a little more than a year old, so its performance history is limited.

Vanguard's VGK tracks the MSCI Europe Index, which is made up of common stocks of companies located in 16 European countries. The fund holds around 600 companies, making this fund widely diversified across the region and by company. The U.K., France, Switzerland, and Germany have the largest weightings in the index. Vanguard, as usual, is a low-cost provider and has the lowest expense ratio in this group, making it an interesting option when matched up to its solid year-to-date return of 15%.

The iShares S&P Europe 350 Index Fund (NYSE:IEV), with nearly $3 billion in assets and a track record going back to mid-2000, is also a popular option. The fund's 0.60% expense ratio is at the high end, but its performance is solid at nearly 25% over the past three years. IEV tracks the S&P Europe 350 Index, a broadly diversified index of large-cap stocks from Europe's developed markets.

With all of the hype and attention that Asia gets these days, it's easy to forget about the other continents -- in particular, Europe. But the European region can be a profitable area for investors to diversify holdings, and there are many options to select from. Whether your investment is a single-country fund or a broadly diversified regional fund, look closely to make sure the fund meets your specific needs, since each fund can vary significantly from its peers.

Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.